# Equity Swaps

Could someone help me understand these bad boys? Answer is C. ----------------------------------------------------------------------------------------------------------------- Consider a 1-year quarterly-pay \$1,000,000 equity swap based on 90-day London Interbank Offered Rate (LIBOR) and an index return. Current LIBOR is 3.0 percent and the index is at 840. Below are the index level and LIBOR at each of the four settlement dates on the swap. Q1 LIBOR = 3.2% Index = 881 Q2 LIBOR = 3.0% Index = 850 Q3 LIBOR = 3.4% Index = 892.50 Q4 LIBOR = 3.9% Index = 900 At the second settlement date, the equity-return payer in the swap will: A) receive \$42,687. B) receive \$21,187. C) receive \$43,187. D) pay \$21,187.

answer: C Since equity-return payer by definition pays return on the index and receives LIBOR, the logic is as follow: Index return 850/881 = -3.518%

You need to consider 3.2% and not 3 % always beginning yr interest

I agree with smeet I believe 3.2% is the appropriate rate

perfect, yes schweser also used 3.2% so if they ask for the 3rd settlement date i should use the rate for the 2nd settlement date?

I think for any of these interest rate questions we use beg yr interest rate? Can anyone confirm this?

answer is C use the beginning period rate for the LIBOR side so 3.2 / 4 = 0.8% for the equity return: 850/881 - 1 = -3.5187% total change = 4.3187% * 1M = 43187\$ Choice C

smeet Wrote: ------------------------------------------------------- > I think for any of these interest rate questions > we use beg yr interest rate? > > Can anyone confirm this? Beginning of period interest rate. A swap is just literally “swapping” investment returns. If you deposit money in 3-mo LIBOR you get your interest at the end of the period so in a swap you pay based on the beginning of the period interest rate.

i’m going nuts. i say the answer is C and then justify answer a. N yes u always use beginning rate, as Joey explained so good.